Two other Nordic countries join the North Atlantic Treaty Organization. The real winners are US defense companies.
Finland and Sweden formally applied to join NATO last week. If admitted, they would join their northern neighbors in the alliance and open up an important new market for American defense contractors.
It would be a great victory for Raytheon (RTN), Lockheed Martin
The Russian invasion of Ukraine was a shock wave for Europe. For much of the past eight decades, the continent’s democracies have enjoyed a peace dividend. Elected leaders have spent lavishly on social safety nets while largely ignoring that the world remains a dangerous place. The creation of the European Union accelerated pacifism. The images of the destruction of Ukraine changed everything.
Prior to the February 24 war in Ukraine, support for Finland’s NATO membership was between 20 and 30 percent. According to an Associated Press report, 70% of Finns now want to join.
Sauli Niinistö, President of Finland, succinctly summarized the change.
Before the war, Finland controlled its political allegiances, he says. While the country contributed to NATO Air Policing initiatives in the North Sea, Finland also shared an 830-mile border with Russia, which brought many economic benefits. Invasion removed non-alignment as an option. Finland was either with Russia and defenseless or aligned with NATO.
Treaty obligations will result in a significant increase in defense spending. Finland has already ordered 64 new F-35 fighter jets, the elite joint combat aircraft developed by Lockheed Martin, Northrop Grumman and BAE Systems (BAESY). The JSFs cost between $110 and $135.8 million.
More importantly, alignment with NATO is a commitment to interoperability with the US defense ecosystem. This directly benefits large American entrepreneurs. The market for their products is booming and they won’t face any competition for the foreseeable future.
In the short term, the increase in income for me will be minimal. Defense contractors recognize sales when systems are delivered, which can take several years. In the meantime, the sector will benefit from additional bills passed to support the war effort in Ukraine.
President Biden signed a $40 billion Ukrainian war package last week. The United States is sending existing equipment to this war-torn country. These systems will then be replenished at an additional cost to US taxpayers.
The Javelin missile system manufactured by Raytheon has become a vital part of Ukraine’s defense effort. According to data published on Free Radio Europe.
In early April, the US Department of Defense said 7,000 Javelins had been deployed to Ukraine. For perspective, another DoD procurement document notes that Raytheon was never able to produce more than 6,480 units in a 12 month period.
The F-35-ification of European armies, however, could be more significant. In addition to the cost of the units, corresponding floor support, spare parts and maintenance, there is a locking factor. Europe is now committed to American-made equipment for decades to come.
The advantage for Europe is peace of mind.
If Finland and Sweden are accepted into NATO, these countries would join their Nordic neighbors Denmark, Norway and Iceland. The five countries are currently working together under the Nordic Defense Cooperation Pact. The integration of NORDEFCO into NATO would facilitate joint planning, cut off Russian maritime access to St. Petersburg and strengthen the defense of the North Atlantic and Arctic sea routes.
US defense contractors are reliable technology partners. The companies are also supported by the US defense budget, a record $810 billion in 2021. There is no political appetite to cut military spending. And that feeling is spreading around the world, thanks to the carnage in Ukraine.
Raytheon, Lockheed Martin and Northrop Grumman are currently the best way to play this big trend. At share prices of $90, $424 and $443, the shares are trading at 15.5x, 14.9x and 16.3x forward earnings, respectively.
Given the prospect of new markets in Europe in the foreseeable future, these multiples seem inexpensive. Longer-term investors should consider buying stocks on further weakness.
To learn how to dramatically improve your market results by buying options on stocks like Ford and Tesla, take a two-week trial at my special service, Tactical Options: Click here. Members made more than 5x their money this year.